Greenspan: Banks Shouldn't Be "Too Big to Fail"

By: Stephanie Condon
Topics: Economy

(AP Photo/Lawrence Jackson)

In response to last year's financial crisis, federal regulators offered the nation's banks billions of dollars, arguing they were "too big to fail." Yet that idea is a more serious threat to the nation's economic growth than many realize, Alan Greenspan, former Chairman of the Federal Reserve, said Friday.

"'Too big to fail' is a major problem," Greenspan said at The First Draft of History, a conference in Washington, D.C. "It has a major impact in the way investments are made."

There needs to be a fee or an additional tax, Greenspan said, or some way "to make no institutions too big to fail." Politically, however, he acknowledged that this was very unlikely to happen.

"The problem is when you have institutions too big to fail, it is essentially saying they... cannot compete in the marketplace," he said. "Those institutions' capital... are being financed by national savings. To this extent, it is they and not the more cutting edge technologies getting the capital."

This goes against the very purpose of the financial system, Greenspan said, which is to "direct (the nation's savings) to those physical investments with the greatest promise."

While curbing the existence of institutions that are "too big to fail" may be politically unfeasible, it is not the only idea Greenspan said is necessary but unpalatable to Washington. He repeated his assertion that the United States government will have to raise taxes as the economy comes out of the recession.

"The budget is so badly out of balanced that we've got to do something," he said. "It's got to be both on the spending side and the tax side. I look, for example, at Medicare and just say we've got to significantly increase co-payments as we move up the income scale."

He added that he is not a fan of the value-added tax, but sees it as "the least worse" way to come out of the current economic problem on the tax side.

More from the "First Draft of History" Conference:
Lindsey Graham Hits Glenn Beck and Bill O'Reilly
Geithner: Goal is not to Save People From Mistakes
Petraeus: Afghanistan is not Iraq or Vietnam
Doctor: U.S. Needs to Control "Tsunami of Obesity"
McCain Pushes for More Troops for Afghanistan

Stephanie Condon
Stephanie Condon is a political reporter for CBSNews.com.
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by SHEETPAN October 3, 2009 10:27 PM EDT: Now he tell's us!; Reply to this comment


by quapawsix October 3, 2009 12:12 PM EDT: If you want to revolt against the top 2% the best way is to buy only the necessary things you need as well as looking for ways to acquire what you need through alternative ways, and stop the excess buying. When it comes to Christmas this year buy little things and not the big ticket items we really don't need. Christmas is supposed to be a religious occasion and not an excuse to drain you wallet or rack up massive debt. Lets all rethink what we are doing.; Reply to this comment


by quapawsix October 3, 2009 12:01 PM EDT: This use to could needs to stayed retired and keep his yap shut.; Reply to this comment

by quapawsix October 3, 2009 11:56 AM EDT

Remember you herd that from the man who said "I missed that one".

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by fedup12 October 5, 2009 8:10 AM EDT: herd?


by kenhamlett October 2, 2009 4:44 PM EDT: Greenspan is one of the main reasons we have problems now. Somehow he has decided that a couple of months has erased our memories of his flagrant manipulation and abuse of our economic system. He and his kind should not be allowed to meddle in the affairs of our people.
His opinion is not relevant to any discussion of financial stability.; Reply to this comment


by noloyalisti October 2, 2009 1:55 PM EDT: so NOW the corporate-criminal, idiot is coming clean. After his policies sunk the US economy.

We are in a class war, the top 2% against the rest of us. We have allowed the rich and big corporations to take over 95% of the wealth in this country. It is time to take it down and take it back.

Too Big to Fail is Too Big to Exist. How about TOO SMALL TO FAIL?; Reply to this comment

by Marc_1986 October 2, 2009 1:41 PM EDT

This man has it right.

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by fedup12 October 5, 2009 8:09 AM EDT: Noooo ya think??? With the greed and corruption of big banks and business we do need to limit their size so that when their cooked books and other bad business practices come to a head they do not take the rest of us down with them.

Or we could let the cons deregulate them some more and just let them do what they want.